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Weekly Update: Market for sale of solar power to commercial and industrial consumers picks up

Weekly Update: Market for sale of solar power to commercial and industrial consumers picks up

We observe a trend in the Indian solar PV project development space towards bilateral, open access, contracts (often under the ‘group captive’ model) for sale of power to industrial consumers.

Many project developers are keen on the market for bilateral sale of power, while some are already selling power directly to industrial consumers

Project developers plan for only a portion of Renewable Energy Certificates (RECs) to be sellable given the uncertainty of the REC mechanism

Rather than building a system at the client’s location, developers opt for a ‘group captive’ model, since it offers more bankability and flexibility

First Solar became the latest entrant to a group of prominent developers that have announced their interest in this market (refer). According to market sources, developers such as Kiran Energy, SunEdison, Moser Baer and Welspun are keen on the market for bilateral sale of power. In the past, we have already seen projects by M&B Switchgear in Madhya Pradesh and EMMVEE in Andhra Pradesh selling power directly to industrial consumers.

These projects typically rely on the Renewable Energy Certificate (REC) mechanism to become financially attractive. However, given the uncertainty of the REC mechanism, most developers have planned for only a portion of the RECs to be sellable. For example, while calculating a project’s financial viability, a developer may consider a sale of only 50% of the RECs generated by 2017. Based on such assumptions, developers have been able to offer a tariff of INR 4.00 – 8.00/kWh to industrial consumers. A focus is on states such as Madhya Pradesh and Andhra Pradesh, where the open access charges for solar power have either been waived off or are below INR 1.50 per kWh.

Since, there are significant risks associated with supplying power to a single customer and building a system directly at a client’s location. To mitigate this risk, many developers are more comfortable with providing power through the grid to multiple off-takers located in industrial clusters. The plant would be set up nearby. This is called a ‘group captive’ model. Under this model, in case of a dispute with one or more of the off-takers, a developer can easily find another off-taker for that share of power, making the model more bankable. It can also give the developer some flexibility to sign short-term power purchase agreements (PPAs), opening up a new customer segment. Along with flexibility and bankability, this model also provides scale (project sizes are typically 10 MW and above), which can help bring down the tariff, if the scale effect is larger than any additional grid charges.